Have directors at Chip Eng Seng gave up a lot for Singhaiyi director’s ownership

On 05 October 2018, seven of Chip Eng Seng Corporation Ltd (CES) directors, including founder Lim Tian Seng, and his brother, executive deputy chairman Lim Tiang Seng sold their stakes amounting to 29.73 per cent of the total issued capital of CES to Singhaiyi Limited’s Celine Tang. In a filing made through the Singapore Exchange, the seven directors disclosed that they have entered into a sale and purchase agreement to sell an aggregate of 186,105,000 shares at S$1.08. The total consideration amounted to S$201 million, and Celine Tang is set to become one of the largest shareholders through this married deal.

Why sell now

This is a question many shareholders would like to find out. The Company has recently gone into the education business, and it forked out 100 million Chinese Yuan to purchase an education software company called Guangzhou Yuanda Information Development in mid-September. This was a continuation of its diversification strategy outlined in March where it disclosed its plans to venture into the education sector. In July, CES announced that its subsidiary has entered into a sale and purchase agreement with private equity capital firm, Navis Capital to acquire 70 per cent of White Lodge Education Group for S$13.3 million. White Lodge operates a chain or pre-school centres in Singapore and Malaysia.

Impact to the stock price after the married deal

Source: Phillip Securities Pte Ltd (10 October 2018)

As readers might note from the one-year daily chart above, the stock price kept free falling without any support level since the date of the announcement on 05 October when the stock price was at its highest level at S$0.95. On Wednesday, 10 October, the stock price has fallen to S$0.79 or about 16.8 per cent decline.

The management has not revealed a lot on the married deal with Celine Tang. In response to various queries by The Business Times, there have not been much responses coming from both Tang, and the Chief Executive Officer (CEO), and son-in-law of Mr. Lim Tiam Seng, Mr. Raymond Chia. With the lack of information, the reaction coming from investors might be a natural response where ‘Sell first, then decide later’ becomes the main motivation to unload.

Moreover, there will be many questions on the difference in the share price of S$1.08 compared to what the shares are trading right now at around S$0.79 per share. Is this suppose to be working in the interests of the shareholders as they go about making such a deal? What is the intention of choosing Singhaiyi’s director Celine Tang as the party to do this deal? Readers do have to take note that the 29.73 per cent share stake that Tang took on stopped short of the 30 per cent threshold needed to trigger a mandatory takeover offer. What is/are the reasons of Tang for not taking over CES outright

How do CES financial fundamentals stack up

With a market capitalisation of S$500.8 million, Chip Eng Seng’s stock price is currently trading at 0.638 times historical price-to-book (P/B) value and a 12-month historical price-earnings (P/E) ratio multiple of 10.941 times. According to SGX Stockfacts, the market consensus rating for the construction and property development counter is ‘Overperform’. The stock is also trading at a 12-month dividend yield of 5 per cent.

In a research note by DBS Vickers published on 06 August 2018, the analyst had a 12-month target price of S$0.75 per share. Although the 2QFY2018 financial results revealed 1HFY2018 net profit jumped 181.9 per cent year-on-year (YoY) to S$17 million from S$6 million in 1HFY2018 from higher revenue from property development (+41 per cent yoy) and hospitality (+131 percent), this was offset by softer performances from construction (minus 30 per cent YoY), and property investments & others (minus 36 per cent YoY).

Despite the strong performances in multiple fronts, the DBS Vickers analyst noted that the strategy of the education venture remains unclear. Thus, the overall rating given was ‘Fully Valued’.

Should shareholders bail out now

With lots of uncertainties, and lack of news following the 05 October sale of shares by the directors to Singhaiyi’s Celine Tang, shareholders might feel that they should sell their CES stock holders immediately. However, they might want to consider to wait out to wait for the official announcement by management. They might also want to examine the context of the motivating factors surrounding the directors’ sale of their shares, and the size of the dollar amount. One of the major uncertainties is why the directors should sell now given that there are expansion plans underway. Is the lack of information from the management might mean that there are strong motivating factors to head for privatisation given that there are many compelling factors to do so including the impacts from the 05 July property cooling measures.

Additional Disclosures: All views are based on the author’s personal views, and it should not be taken as a recommendation to buy or sell the counter. Please do your own due diligence carefully and/or seek the opinions of a licensed professional financial adviser if necessary.

Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008.
Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning